Vendors worry about high costs of insuring shipments and whether they would be paid if Toys R Us files for reorganization.

(Bloomberg)—Some suppliers to Toys R Us Inc. have scaled back shipments to the retailer as it struggles to refinance debt and avoid a potential bankruptcy filing, according to people with knowledge of the matter.

The vendors are balking as Toys R Us, No. 38 in the Internet Retailer 2017 Top 500, continues talks with lenders over a new loan that would allow the company to stay open while it works out a recovery plan through bankruptcy proceedings, said the people, who asked not to be identified because discussions are private. The loan is being marketed by Lazard Ltd. to banks and existing creditors, said one of the people.

Suppliers pulled back in part because the cost to insure their shipments to cash-strapped Toys R Us has become too expensive, said the people. Vendors often rank among creditors with the lowest priority for getting repaid if a company seeks court protection, and their decision on whether to continue shipping goods can play a large role in determining a retailer’s fate.

(Editor’s Note:  Toys R Us filed for Chapter 11 bankruptcy protection late in the day on Sept. 18 in the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond, Va. In a statement, the company said its “approximately 1,600 Toys ‘R’ Us and Babies ‘R’ Us stores in the United States and around the world—most of which are profitable—are continuing to operate as usual.” It also said it had received a commitment for “over $3.0 billion in financing from multiple lendors.”)

Representatives for Wayne, N.J.-based Toys R Us and Kirkland & Ellis, which advises the company, declined to comment. Lazard didn’t immediately respond to messages. A possible bankruptcy was previously reported by CNBC, and Debtwire reported last week that the retailer was exploring a bankruptcy loan, known as debtor-in-possession financing.

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Holiday rush

Toys R Us needs to find a financial solution quickly and resume shipments because the cash-strapped chain makes about 40% of its sales during the fourth-quarter holiday season, according to company filings. Much of its strategy revolves around getting exclusive products from key vendors, along with support for advertising and marketing. The retailer interacts with suppliers through a Vendor Connect portal, also known as a vendor extranet, which includes a Merchandise Vendor Payable Portal that was temporarily inaccessible today. It also interacts with suppliers through an EDI system it can access via the web.

The toy merchant has been seeking to refinance $400 million of debt that comes due next year. No decision about seeking court protection has been made, one person said.

Toys R Us has vexed private equity owners Bain Capital, KKR & Co. and Vornado Realty Trust, which loaded the retailer with debt in a $7.5 billion buyout more than a decade ago. Last year, the chain extended maturities on some of its borrowings, giving it more time to act on CEO Dave Brandon’s turnaround plan. He’s looking to spruce up stores with more toy demonstrations and other experiences, which would help give the chain an edge over online sites such as Amazon.com Inc. (No. 1).

The chain’s revenue has continued to decline as it competes with industry giants Wal-Mart Stores Inc. (No. 3), Target (No. 20) and Amazon. It’s also contending with a broader shift in retail, with more purchases going online and toward experiences and home renovations. That’s sparked an increase in store closings and retail bankruptcies this year. During the toy merchant’s fourth quarter, which includes Christmas, same-store sales fell 2.5% in the U.S. and 4.9 percent internationally.

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Some success

Still, Toys R Us remained profitable by some key measures, generating $790 million in earnings before interest, taxes, depreciation and amortization. That was the most since 2012. The company will report second-quarter results on Sept. 26.

As doubts about the company’s health mounted, the cost for debtholders to insure against a default by Toys R Us surged in the past week to levels that imply a more than 60% chance it won’t meet its obligations in the next year. Credit-default swaps expiring in June were trading at 36 percentage points upfront, or $3.6 million for every $10 million of debt insured, according to data provider CMA. That’s up from $300,000 per $10 million at the start of the month.

Hasbro Inc. is among toymakers that hasn’t curtailed shipments, spokeswoman Julie Duffy wrote in an email. “We continue to partner and ship, conducting business as usual, while managing our risk across all retailers to the appropriate levels,” Duffy wrote.

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